~ YOUR REALTOR

Monthly Archives: November 2012

≈ Comments Off on Builders’ woes stem from flawed market for real estate

It is ironical that finance minister P Chidambaram should ask banks to bail out builders when, in reality, it is banks who are at the receiving end of builders’ intransigence and adventurism.

That apart, when banks bail out borrowers, they do not do it with their own funds (read: shareholder capital). They do it with depositors’ money and when, as is often the case, these bailouts fail or entail a big sacrifice by way of interest concessions, etc, it is taxpayers who pick up the tab. Hence, it is important to keep this distinction in mind while urging banks to come to the rescue of a particular sector/borrower.

Whether it is Air India or Kingfisher Airlines 3.03 %, the telecom, power or housing sector, there is a cost involved in every restructuring. It should be left to the commercial judgement of banks to decide whether they wish to restructure or not. If, in their opinion, it would be a case of throwing good money after bad, the government should respect that judgement. If, however, the government feels there is a larger positive externality for the economy, it should use money directly from the budget to support the sector/borrower.

This is what the US government did in the case of General Motors when it bailed out the US carmaker in the aftermath of the crisis. Using banks, even state-owned banks, as a proxy to attain government’s objectives is a suboptimal solution. It is opaque, vitiates lending discipline, distorts incentives and is unfair to both depositors and taxpayers.

If builders are in financial difficulties today, deficient policy that sends out all the wrong incentives to builders is primarily to blame. Instead of planned urbanisation that anticipates the demand for new urban spaces to accommodate growing manufacturing and organised services, policy offers builders rent-seeking opportunity in shortage, leading to accumulation of land banks and inventories of built-up space that refuse to get sold at inflated prices.

If policy will allow builders to make their money from the value they add, rather than from gambling on shortages and rents, that would be the biggest source of relief for builders.